Wednesday, October 15, 2008

WASHINGTON - U.S. retail sales fell off a cliff in September, plunging by the largest amount in three years as worried consumers shunned the malls and auto showrooms in the midst of the country's financial meltdown.

The Commerce Department reported Wednesday retail sales decreased 1.2 percent last month, nearly double the 0.7 percent drop that had been expected. It was the biggest decline since retail sales fell by 1.4 percent in August 2005.

The bigger-than-expected decline significantly increased the risks of a recession because consumer spending is two-thirds of total economic activity.

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The weakness was led by a 3.8 percent drop in auto sales. Sales dropped below 1 million units as consumers struggled to find financing.

Retail sales have now fallen for three consecutive months, the first time that has occurred on government records that go back to 1992. Economists had expected sales to be down in September as a flood of bad news about the financial system and rising unemployment increased consumers' worries.

Many analysts believe the overall economy, as measured by the gross domestic product, is slipping into a recession, triggered by a steep slump in housing and the severe credit crisis.

Even excluding auto sales, retail sales showed widespread weakness, falling by 0.6 percent or double the decline outside of autos that had been expected.

"The consumer shut up shop even before the markets got crushed and that is not good news for the economy," said Joel Naroff, chief economist at Naroff Economic Advisors. "What is ominous is that the declines in spending were broad based."

With the financial meltdown taking place over the past four weeks, the wild gyrations of the stock market, culminating in an almost 2000 point drop in the Dow, and the rising fears of a U.S. recession, it is no wonder that consumers are cutting back on their spending. What is more, if you look at the graph, you can see that retail sales have been dropping continuously since June--this is not just a one-time event, but rather a trend as Americans look at the U.S. economy, look at the job picture, the heath care crisis, and the financial meltdown, and they are worried about what they are seeing. As a result of these economic worries, Americans are cutting back on their spending. The U.S. economy is heading into a bad recession--if we're not already in it.

Update: The Dow just dropped 450 points, possibly in reaction to the plummeting September retail sales report. Also from MSNBC News:

NEW YORK - Wall Street tumbled again Wednesday after a disappointing retail sales report offered fresh evidence that an intractable freeze in the credit markets since last month has caused cracks in the economy well beyond the banking sector.

The Dow Jones industrials dropped more than 450 points, giving back a chunk of their huge 936-point advance from Monday, and all of the major indexes were down at least 4 percent.

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In early afternoon trading, the Dow Jones industrial average fell 452.32, or 4.86 percent, to 8,858.67.